General election 2010: VAT rise is a risk under Labour

The threat of a substantial rise in VAT if Labour wins the general election
was raised when Gordon Brown refused to rule out increasing the tax.

The Prime Minister Gordon Brown stands with his chancellor Alistair Darling and Labour party Deputy Leader Harriet Harman as he launches the Labour Party election manifestoPhoto: GETTY IMAGES

By Rosa Prince and James Kirkup

10:04PM BST 12 Apr 2010

Unveiling the party's manifesto for a fourth term in office, the Prime Minister and senior colleagues repeatedly declined to give a promise not to increase VAT from 17.5 per cent during the next Parliament.

Instead, Labour's manifesto only ruled out extending the scope of VAT, pledging that it would not be levied on items such as children's clothes, public transport and newspapers.

Economists said that "left the door wide open" to tax rises after the election.

Each percentage point increase in VAT costs consumers a total of £4.5 billion, equal to £180 a year for every household.

A VAT rise of two and half per cent to 20 per cent, for example, would cost each household more than £450 a year.

With the Government on course to record a deficit of £167 billion this year, all parties are under intense pressure to explain how they would rebalance the public finances.

The Conservatives are likely to face questions about their stance on VAT when they publish their manifesto today, especially as they are committed to offering voters a £6 billion-a-year tax cut by blocking Labour's National Insurance rise and a £550 million tax break for married couples.

Pressed yesterday for a guarantee that Labour would not increase the VAT rate, Mr Brown replied: "We've never actually made any promise about the VAT rate. But I can give you an absolute assurance that we have not raised VAT since 1997."

Last night Alistair Darling, the Chancellor, said it would be "absolutely daft" to rule out tax rises.

Last autumn Treasury officials drew up plans to put up VAT, but ministers chose instead to increase National Insurance from next year. Mr Brown claimed yesterday that the Government's plans to tackle the deficit "add up". But the independent Institute for Fiscal Studies said he had failed to answer many of the most important questions about tax and spending.

In its manifesto, Labour had "listed plenty of new things it would like to do, but was no clearer about where the spending cuts would fall. And it listed a few tax increases that it promised not to implement, but left the door wide open to many others", the institute said.

A commitment to setting up a commission on funding social care raised the prospect of a "death tax" on people's estates.

A plan to review the whole system of local government finances could pave the way for a local income tax to replace the council tax.

The Government's plans to increase National Insurance from next April mean a worker earning £40,000 would pay £187 more tax.

Both the Conservatives and the Liberal Democrats have also said they could not rule out increasing VAT rates.

The Labour manifesto does contain a clear promise not to increase the rate of income tax for basic or higher-rate earners.

The party made the same promise at the 2005 election and broke it this month by introducing a new 50p rate for top earners. Mr Brown defended the 50p rate and next year's planned increase in National Insurance rates, insisting it was right to ask those with the "broadest shoulders" to bear the greatest burden after the recession.

Stepping away from New Labour pledges to win over the better-off, Mr Brown said Labour was "the party of everybody of middle income and modest incomes in this country".

The 76-page Labour manifesto – entitled A Future Fair For All – makes no explicit reference to the Government's deficit or the growing national debt. But in a tacit acknowledgement of the dismal state of the public finances, the document contains no significant new spending plans.

It was presented by Mr Brown and his Cabinet to an audience of journalists and 500 Labour activists during a stage-managed event at a new hospital in Birmingham.

Mr Brown and his ministers were given repeated rounds of applause as they spoke, while journalists were booed for asking questions about Labour’s plans on VAT. The manifesto put economic recovery at the heart of the party’s pitch for a fourth term, with a party political broadcast last night warning voters not to take a “wrong turn” in the road to more prosperous times.

It also contained pledges to reform public services. Failing police forces could be taken over by more successful forces, and parents unhappy with their local schools could get powers to remove head teachers.

Michael Gove, the shadow schools secretary, said: “In all the areas where urgent action is needed, Labour is either empty, silent or misleading.”